Twenty-five states are suing the Biden administration in an attempt to block a Department of Labor rule that allows fiduciaries to consider environmental, social and governance (ESG) factors when choosing retirement investments.
Republican attorneys generals from 25 states—led by Texas Attorney General Ken Paxton and Utah Attorney General Sean D. Reyes—filed the lawsuit Jan. 26.
In a statement announcing the filing, Paxton alleged the rule "prioritizes woke Environmental, Social and Governance investing over protecting the retirement savings of approximately two-thirds of the U.S. population."
The DOL rule, which took effect Jan. 30, was finalized in November following an executive order signed by President Joe Biden in May 2021 that directed federal agencies to consider policies to protect against the threats of climate-related financial risk.
SHRM Online gathered additional news on the topic.
DOL Rule Finalized
The final ESG rule—Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights—was finalized in November by the DOL, permitting retirement plan fiduciaries, such as 401(k) plan sponsors, to consider climate change and other ESG factors when they select investment options and exercise shareholder rights, such as proxy voting for plan-held securities.
The DOL concluded that regulations issued in 2020 and subsequently blocked by the Biden administration had unnecessarily restrained plan fiduciaries' ability to weigh ESG factors when choosing investments.
"Fiduciaries have an obligation to provide investment options that take the physical and transition risks of climate change into account," said Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at Ceres, a nonprofit organization working on sustainability challenges.
However, the DOL emphasized that the rule allowed fiduciaries to consider these factors and did not mandate it.
The DOL's final rule is seen as more neutral than previously proposed, some experts contend. That's because, unlike the October 2021 proposal, it does not include examples of specific ESG factors that fiduciaries could consider. It also removed language that said a prudent fiduciary process "may often require" the consideration of ESG factors.
(Pensions & Investments)
Why 'Courts Should Hesitate'
In their filing last week, the states argued that the ESG DOL rule conflicts with the Employee Retirement Income Security Act (ERISA) since current law requires fiduciaries to consider financial benefits first and not any "nonfinancial and nonpecuniary benefits." They also said the DOL is deviating from prior policy because its 2020 rule still required that financial factors take precedence.
ERISA covers some 747,000 retirement plans, 2.5 million health plans, and 673,000 other welfare benefit plans. Employee benefit plans cover about 152 million workers and more than $12 trillion in plan assets—equivalent to more than half of the nation's gross domestic product, the complaint said.
"The sheer magnitude of the assets that the 2022 Investment Duties Rule would affect—over half of the GDP of the entire United States—suggests that courts should hesitate before finding that DOL has authority to regulate in this area for nonfinancial purposes," Paxton said.